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The Ultimate Externality

Saturday, December 1, 2001

Pick an economist at random and ask him or her, “What is government’s chief role?”

The likely answer will be, “To correct market failures.”

Economists have long understood that markets aren’t textbook perfect. Sometimes they fail, most notably when part of the cost of a person’s actions is shifted onto others who don’t consent to bearing this cost. Economists call such problems “negative externalities.” The term indicates that genuine problems arise whenever a decision-maker can foist at least some of the cost of his decision onto others who are external to it—onto unconsenting, peaceful adults.

Preventing such externalities is held to be the principal purpose of the state. Just as the state is duty-bound to prevent Jones from stealing Smith’s wallet, the state must also prevent Jones’s steel plant from pumping toxic chemicals into the air that Smith breathes, or at least compel Jones to get Smith’s permission before polluting.

While genuine externalities no doubt exist in markets, research shows that they are not so common as Economics 101 textbook authors and newspaper editorialists typically assume. For example, prior to the enactment of the Clean Water Act in 1970—which largely substituted bureaucratic regulation for the private property rights that previously governed uses of inland waters—the extent of water pollution in the United States was surprisingly modest and under control. American rivers and streams were emphatically not filthy dumping grounds.

A free people are remarkably creative in devising ways to peacefully “internalize” what would otherwise be externalities.

Government is certainly not the only feasible mechanism for dealing with such potential problems. As Professor Elinor Ostrom reports, “Extensive fieldwork has by now established that individuals in all walks of life and all parts of the world voluntarily organize themselves so as to gain the benefits of trade, to provide mutual protection against risk, and to create and enforce rules that protect natural resources.”

But even conceding that some externalities defy private, voluntary solutions, giving the state the power to deal with them by no means reduces their extent and severity.

First, merely giving government power is insufficient to ensure that this power will be used as intended. To believe that writing words on paper—“the Department of XYZ shall do such and such”—is all it takes to ensure that bureaucracies will carry out a task (and nothing but that task) is to believe in magic. Even if the tasks are not impossible, they are unlikely to be carried out unless government officials have the proper incentives, which they too often lack. One of the greatest follies of our age is the widespread gullible faith that words inscribed on paper following a particular type of ceremony performed in marble-domed buildings will automatically result in the outcomes described by those words.

Second, government by its very nature is itself a source of negative externalities. Even if it carried out every task assigned to it with great efficiency, reliability, and precision, it would unavoidably also create negative externalities—costs imposed on unconsenting, peaceful adults.

Sunday Sales

Consider a simple example: In some U.S. states people cannot buy alcohol on Sundays. As in many other instances, the majority here uses the state to bend the minority to its will without taking adequate account of the desires of the minority.

Imagine someone entering a voting booth to vote on a ballot initiative to outlaw Sunday alcohol sales. Perhaps this person has a genuine religious belief that no one should drink on Sundays. He votes for the initiative.

But what has this person done but unilaterally act to satisfy his own desires at the expense of others who wish to enjoy the option of buying alcohol on Sundays? Just like the factory owner who robs his neighbors of clean air, this voter robs his neighbors of something valuable. And the reason is that, when casting a vote, this person (just like the factory owner) doesn’t have to take the interests of his neighbors into account. He can costlessly impose his will on unconsenting third parties.

Careful readers might object, “No! Every adult citizen can vote. The voting process registers the preferences of both the proponents and the opponents of the ban. The losers in an election had their say. Their preferences just happen to conflict with those of the majority.”

This objection fails. The mere ability to express opposition to behavior that imposes costs on you does not alone protect your interests if those who wish to impose these costs remain free to do so. Suppose that you tell the owner of the polluting factory that you object to his stealing your clean air. Without an effective ability to prevent him from continuing to pollute, he will likely do so. That you spoke out against the pollution to the factory owner—that “your voice was heard”—doesn’t change the fact that the ongoing pollution imposes a negative externality on you.

It’s the same with bans on Sunday sales of alcohol. Each person who votes to ban these sales does so without having to take account of the preferences of others. By simply pulling a lever, each voter acts to inflict his moral views on peaceful others, making them worse off. The votes cast against the ban don’t stop its proponents from voting for it without taking account of the interests of others.

The greater the scope of government power, the greater the number of instances in which each of us, as a voter, can impose our preferences on others. Moreover, because the personal consequences to each voter of yanking this lever rather than that lever are nil, each voter is fundamentally irresponsible. Each can express his views about how others should live without in the least taking serious heed of the consequences to others. And whenever those who prefer to restrict the freedom of others are in the majority, the minority are obliged to obey.

A state that stands ready to coerce those with less political power to do the bidding of those with greater political power is a constant source of negative externalities to the losers. To promote the state as the solution to what few private externalities exist is a bizarre irony and a dangerous hoax.

Donald J. Boudreauxis a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, and a professor of economics and former economics-department chair at George Mason University.